It's Time to Ride with Uber

11/25/2019 5:00 am EST

Focus: TRANSPORTATION

James Kelleher

Director of Research & Senior Analyst: Technology, Argus Research Corporation

We are raising our near-term rating on Uber Technologies Inc. (UBER) from a hold to a buy, as the competitive landscape improves in Uber’s core “Rides” and “Eats” businesses, explains Jim Kelleher, an analyst with Argus Research — a leading source of independent research.

Uber Technologies, founded in San Francisco in 2009, operates global networks for ride-sharing, carpooling, food delivery, and other services.

The company’s smartphone app enables consumers to contact drivers, arrange a meeting point, and get to their destination in a cash-free transaction. Uber has operations in more than 700 cities on six continents, resulting in over 18 million trips daily.

Our long-term rating is also BUY. Uber is the largest player in the ride-hailing industry, and the second-largest player in food delivery. The two industries are expected to see compound annual growth of 15% and 10%, respectively, in 2019-2023, according to data from Statista.

Based on industry data, Uber has a roughly 33% market share in the global ride hailing industry. This gives the company both network efficiencies (as the established leader) along with room for further growth.

Uber’s market share lead and massive driver network mean that the company should, in theory, have long-term advantages over the competition. Network effects create higher earnings potential, which means that more drivers may choose to partner with Uber.

On valuation, Uber shares have fallen roughly 35% since their May IPO, with some of the selling coming as equity investors shy away from unicorn tech stocks.

Although this change in sentiment has caused a selloff in several recent IPOs, including Uber, we think that the concerns are overdone and believe that the pullback will actually help Uber over the long term.

With its IPO in the rearview mirror, Uber is better positioned and better funded than many smaller, nonpublic competitors (including DoorDash, Lime, and Postmates), who may now need to recalibrate their IPO expectations and valuation assumptions.

These companies have relied on successive rounds of pre-IPO financing with the expectation that their valuation will increase each time. However, in the wake of WeWork’s cancelled IPO and subsequent Softbank write-downs, pre-IPO investors may be more hesitant to fund unprofitable startups.

We believe that the shift will improve the competitive landscape for Uber, which also stands to benefit from double-digit industry growth. Factoring these assumptions into our model, we now calculate a fair value for UBER in the mid-$30s. As such, we are setting a price target of $35.

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